blockchain is eating software, the internet, data and the world.

​and it's hungry for seconds.

William Hinman, the Director of the Division of Corporation Finance of the Securities and Exchange Commission ("SEC") recently made remarks at a finance summit. In them, he stated that "current offers and sales of Ethers are not securities transactions."

Most in the crypto industry have anticipated that the SEC would give more guidance by planting a flag on Ethereum. The fact a director has publicly stated Ethereum is probably not a security is seriously seriously seriously great news.

Quick disclaimer - Hinman's statements do not reflect the SEC's final determination about Ethereum. As a Director, he is an influential person, but it's possible the SEC could ultimately come out the other way and say Ethereum is a security.

But ok, why is it such a big deal?

Guidance

It's hard for the digital asset industry to develop when it knows regulation is aggressively ramping up. So Director Hinman's statements give us a better idea of the "utility-to-security" spectrum.

As Director Hinman notes, don't look at the token - look at the circumstances around it. Too many ICOs claim they're not securities because their digital assets can only be used for utilitarian purposes. That's misguided - instead, they should be asking if people are buying into their ICOs with the expectation of selling the digital assets for profit.

Based on Hinman's statements, the following suggest a digital asset is a security:

Broadly marketing, especially to non-users.

Future value is highly dependent on a person/group that sponsored the digital asset's creation.

The founder(s) retained a large interest and buyers believe the founder(s) will work to make the digital asset more valuable.

The founder(s) raised excess funds without good a reason or use for the excess.

Purchasers are buying to make a profit, not for personal use.

There are significant information asymmetries between the digital asset issuer and purchasers.

Mainly the founder(s) exercise governance/influence over it.

The digital asset issuer promotes a secondary (aka, trading) market.

The digital assets are concentrated in the hands of a few persons that have influence over their development.

Digital Asset Conversion

Director Hinman said he doesn't believe Ethereum is currently a security. But he makes an interesting statement before that:

"putting aside the fundraising that accompanied the creation of Ether...."

In other words, the launch and funding of Ethereum may have been centralized enough that it should be considered a security.

But that means a digital asset can start as a security, and transition to non-security. This has been "theory" for a while, but Hinman's statements now strongly suggest it's the way forward.

Which points us to...

SAFTS

If Ethereum is ultimately not a security, Simple Agreements for Future Tokens ("SAFT") are viable. There's been a lot of FUD since the SEC is targeting SAFTs. As a result, thought leaders have questioned whether the SAFT is a viable tool. SAFTs were built so that they're securities on the front-end, and non-securities on the back-end.

But if the ultimate digital assets on the back-end are securities, there's no point in using a SAFT instead of a Simple Agreement for Future Equity ("SAFE"), and all the securities regulations it comes with on both the front- and back-end.

But Hinman's statements strongly suggest SAFTs are indeed viable - an investment can begin as a security, and convert to non-security digital assets.

Non-Securities Exchanges?

If Ethereum is ultimately not a security, it's possible there can be crypto exchanges that only exchange utility tokens (note the word "exchange" and not "trade", as "trading" would be buying to profit).

Archives

This website and any communications related to it do not create a lawyer-client relationship. The material provided on this site may not reflect the most current legal developments. We disclaim all liability for actions taken or not taken based on any or all of the content of this site. Do not act or refrain from acting upon any information herein provided without seeking professional legal counsel.

Nothing written, linked or referenced is financial or investment advice.

The views, explanations, positions and statements made on this blog are not to be treated as conclusive opinions of any person or entity, whether lawyer, law firm, investment adviser, investment institution or the like.

You can stay up-to-date with crypto news and regulation by subscribing to our (infrequent) email list: